Don’t junk the U.S. auto industry

November 19, 2008

eugene-ludwigMr. Ludwig, a former U.S. Comptroller of the Currency, is founder and CEO of  consulting firm Promontory Financial Group. Any opinions are his own; GMAC Financial Services is one of Promontory’s clients.

The economic upheaval wreaking havoc on the global financial system is threatening to claim another victim: the domestic automobile industry and its financing arms.

General Motors Corp. could run out of cash by January without help. Ford Motor Co. and Chrysler LLC also need fast government intervention to stay solvent. Automakers and the UAW are making their case to Congress this week for emergency help. But even the supporters of a $25 billion aid package for the auto industry are dubious about whether they have the votes to pass it.

This raises the question, why not just let them go bankrupt?  The domestic auto industry is everyone’s favorite whipping boy, and its problems have been growing for decades. Some are of its own making; many are circumstantial. But we cannot blithely accept its failure as somehow inevitable or deserved.

Our economy has been badly battered in recent months, and has become increasingly fragile. The erosion of our industrial base already presents real security risks to our nation. Why would we accelerate this sorry state of affairs at a time of national crisis by sitting on our hands and letting a signature American industry collapse?

The American auto industry is well worth saving, for many reasons.  One reason is that for the past decade Detroit has made heavy investment and steady progress in improving its competitiveness, what it calls “altering the DNA” of American cars.  US automakers spend $22 billion annually on plants, equipment, research and development. Breakthroughs are at hand in developing alternative fuel propulsion systems, and our national well-being and security depend upon seeing them through to completion.

If we allow U.S. automakers to go under out of anger, resignation, or ideology, it will only mean all the work and investment of the last decade will be ceded to our foreign competitors instead of being plowed back into the U.S. economy.

Another reason is the industry’s importance to the job market and the wider economy.  Automobile manufacturing directly employs a quarter of a million workers and indirectly about one in ten U.S. jobs are related to some degree to the automotive sector, according to GM estimates.  So the effects of a collapsed U.S. auto sector would not be limited to Detroit – they would be magnified as the ripples spread to related industries.

If we allow U.S. automakers to fail, millions of retirees depending on auto company pensions will be at risk and auto manufacturing jobs will disappear. The ripple effect won’t end there; millions of jobs in related sectors, such as  U.S. manufacturers of steel, aluminum, iron, copper, plastics, rubber, electronics, and computer chips, will also feel the pain.

Worse yet, the promise of a meaningful future for American manufacturing would fade. As that promise dims, the role played by manufacturing jobs as a passport to the middle class would likewise disappear.

The auto manufacturers did not cause this crisis; they were working hard to reinvent the quintessential American invention when high oil prices and economic upheaval hit, dragging them into the vortex. There is a tendency to think that an example must be made, that someone must be allowed to fail.  But do we really need to cut out of the heart of the real economy? When the patient is in the middle of a full blown coronary, it’s no time to discuss lifestyle changes.

We can and should revisit subjects like executive pay scales and expense controls when the industry isn’t at death’s door.  For now, we should recognize the gravity of the moment, and use the TARP funds and pass necessary auto-related financial stabilization legislation to avoid digging a bigger hole for the national economy.

83 comments

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All this hooplah about CEOs and private jets is just a red herring. John said it all in his comment, just read that; perfectly said. As for bankruptcy working as a viable option for the airlines (Eric’s comment), there is one key difference–the average American isn’t buying an airplane. But we do buy cars. Would you feel comfortable buying a car from a bankrupt carmaker? How about getting it serviced and getting parts with the prospect that the manufacturer could disappear shortly? Bankruptcy is not a workable solution. We need to lend a helping hand to the Big 3.

Posted by Mike Archer | Report as abusive

The Big 3 are not looking for a bail out! Only a loan from the Federal Government. If you look at the amount of Federal monies that all the employee,s at the Big 3 pay into the federal taxes you will total this in the billions.This would basically be a loan from the people-to-the-people of the Big 3 automakers!!!!! I beleive the Big 3 automakers should shutdown all their plants for 6 months and let the american people feel what the impact financially to this country would be. Also after 911 all three companies dontated 10 million dollars each along with product to New York City.

Posted by Danny Kirkpatrick | Report as abusive

As the controller of a closely-held business enterprise I can partially agree with “bankruptcy is not the end” but it will cause significant “collateral” damage through additional bankruptcies throughout the automotive supply chain.

A significant portion of our business base was/in within the steelmaking industry,(another industry known for the same faults that the american automotive industry is guilty of.) While steelmaking continued to run “business as usual” they kept continued, extended pressure on the supplier base for lower and lower pricing and extended payment terms(90 – 120 days). Within a short 1 – 2 year period we experienced roughly $750,000 in lost revenues in addition to losses in ongoing business due to closed capacities.

The winners in the whole bankruptcy scenario?, the accountants and attorneys for the bankrupt companies(thanks to their having first priority to available funds) and the officers and interim officers of the bankrupt companies. Years later the venders(those who survived)received less than 1/4 of 1 percent of what was due to them.